JJ Industries will pay a regular dividend of $3.15 per share for each of the nex
ID: 2772192 • Letter: J
Question
JJ Industries will pay a regular dividend of $3.15 per share for each of the next four years. At the end of the four years, the company will also pay out a $83 per share liquidating dividend, and the company will cease operations. If the discount rate is 8 percent, what is the current value of the company’s stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
JJ Industries will pay a regular dividend of $3.15 per share for each of the next four years. At the end of the four years, the company will also pay out a $83 per share liquidating dividend, and the company will cease operations. If the discount rate is 8 percent, what is the current value of the company’s stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Current Value of Company’s Stock = 71.44
Working
Dividend for next 4 years D = $ 3.15 per annum
Liquidating Dividend at the end of 4 the year L = $83
Time Period n = 4 years
Discount Rate r = 8% or 0.08
Price = D* {1-(1/(1+r)^n}/r + L/(1+r)^n
= 3.15 * {1-1/(1+0.08)^4}/0.08 + 83/(1+0.08)^4
= 3.15 * { 1- 1/1.08^4}/0.08 + 83/1.08^4
= 3.15 * { 1-1/1.3605}/0.08 + 83/1.3605
= 3.15 * {1-0.7350)/0.08 + 61.01
= 3.15 * 0.265/0.08 + 61.01
= 3.15 * 3.3125 + 61.01
= 10.43+61.01 = 71.44
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